State Forestry Director Resigns

LITTLE ROCK — Embattled Arkansas Forestry Commission Director John Shannon announced his resignation Friday after state auditors released a report sharply critical of his management of the agency's finances.

In the report, presented Friday to the Legislative Joint Auditing Committee, state auditors said Shannon "did not exercise due diligence in his oversight of agency financial activities," which included the misuse of federal grant money over a four-year period.

Facing a $4 million shortfall, Shannon laid off 34 employees last month. Two others agreed to retire.

Auditors said the report would be turned over to the Pulaski County prosecutor's office.

Shannon told the committee Friday that his resignation, submitted Thursday to Gov. Mike Beebe, would be effective at the end of the day Friday.

"When I say the buck stops with me, I mean the buck stops with me," he said.

Shannon later told reporters he had been advised that Beebe planned to ask for his resignation based on a preliminary draft of the audit report, unless the draft changed. Beebe confirmed that he had conveyed that message to Shannon through his chief of staff, Morril Harriman.

"My reading of the conclusions said that there were a couple of people that didn't do right," Beebe said, clarifying that those people were Shannon and Robert Araiza, the agency's former chief financial officer.

Auditors said in the report that between July 1, 2006, and Dec. 31, 2011, the period they reviewed, Araiza made 59 transfers from federal grant funds to make payroll, even though the grants were not authorized for that purpose. The total amount borrowed was $6.4 million, of which $1.6 million has not yet been repaid to the federal government.

Five additional transfers were not documented, possibly increasing the amount the agency owes to the federal government to $2 million, according to the report.

Auditors also said Araiza filed inaccurate financial statements regarding the use of the federal money.

The agency borrowed the federal money because its revenue from the state timber severance tax and timber sales had dropped, auditors said.

Auditors said Araiza told them he approached Shannon in September 2007 and told him the agency could not make payroll without additional revenue. He told auditors that Shannon told him he could borrow against the agency's federal grant money as long as the money was repaid.

Shannon said in testimony Friday that Araiza's claim that he authorized borrowing the money was "flatly untrue."

Araiza, who now works for Arkansas Rehabilitation Services, said after the hearing, "I haven't lied, and I've got documents to prove I haven't lied. He has lied, and yet he hasn't admitted it. I wonder why he resigned?"

Auditors said Shannon continued to allow the practice of borrowing against the federal grants to continue even after he was told in June 2010 that it was improper. They also said he did not implement significant cost-saving measures until the current fiscal year.

Auditors said in the report that Doug Akin, assistant state forester for management, told them he did not know about the borrowing of federal funds until Nov. 17, 2011. When auditors showed Akin copies of the agency's grant schedules dating back to April 2009, he said that he should have known about the borrowing of the federal money.

State Department of Finance and Administration Director Richard Weiss testified that DF&A would begin reviewing "all of the fund lines, the 1,700-some-odd funds that are out there in state government," and will be "doubly diligent" in reviewing the Forestry Commission's funds.

Weiss said he believed what happened at the Forestry Commission was an isolated incident and was not occurring at other agencies.

"We've not really had anybody get off the reservation like this before," he said.

Several legislators commended Shannon for stepping down.

"I thank you for doing what I believe is the honorable thing," said Rep. Nate Bell, R-Mena.

Rep. Bryan King, R-Green Forest, said after the hearing he still had questions about when DF&A and the governor's office first knew about the seriousness of the Forestry Commission's financial problems. He produced an email dated April 9, 2010, from Shannon to Kathy Holt in Beebe's office, in which Shannon said, "I just spoke to (former state Budget Director) Mike Stormes to give him a heads-up on Forestry Commission finances."

Later that year, Beebe quashed a meeting at which Shannon had planned to discuss with timber industry leaders the possibility of raising the timber severance tax. The governor has said he did not know at the time how serious the agency's budget problems were.

"My question to the governor's office that they won't answer is, why didn't you allow that presentation to happen but say, 'Taxes are off the table. Taxes are off the table, but let's talk about solutions.' ... We would have been having this discussion in 2010 and we could have averted this," King said, noting that Beebe was in a re-election contest in 2010.

Beebe said Friday, "The meeting was not about the agency's fiscal situation. The meeting was about taxes, and I didn't feel like it was time to raise taxes. Had there been proper information about the nature of the fiscal distress at the agency, then two months later you're in the session, January, and you could have taken whatever steps needed to be taken — had anyone known. I certainly didn't know, DF&A obviously didn't know, our staff didn't know and the Legislature didn't know."

Beebe announced this week that he has directed the state Department of Agriculture to shift $550,500 to the Forestry Commission to restore 15 firefighter jobs.

The governor also has asked the Legislature, which begins its fiscal session Monday, to appropriate $2.7 million from the state's surplus to repay money the commission owes to the federal government and get the agency through the end of the current fiscal year.